State may pay more if banks fail stress test

The State could end up paying more for the Irish banks if they fail the stress test next year as the bailout fund, the ESM, is ruling itself out and bailing-in the shareholders has become more acceptable.

Head of the ESM, Klaus Regling, said in an interview that the fund could directly lend to banks in the future, but only when banks have been under the supervision of the European Central Bank for some time.

He ruled out the fund buying the Irish State’s shares in the banks, Allied Irish Bank and Irish Permanent. “Member states of the euro area have said that will be either difficult or impossible”, Mr Regling told the Wall Street Journal.

This was one of the ways in which the Government hoped to reduce the amount of debt which is currently around 120%, but the ECB and the ESM have been very negative about it for some time.

The issue of recapitalising banks is rapidly coming to the fore again with stress tests next year ahead of the ECB directly supervising 130 banks, including the Irish banks.

Other eurozone sources confirmed Mr Regling’s message that the ESM would be unlikely to provide funds for banks. As the treaties now stand, they could only lend to the state who would guarantee repayment as they did for Spain, even though this maintains the link between the sovereign and banks.

There is no rush to change this as many of the triple A rated countries are now emphasising they do not want their taxpayers’ money — including that in EU funds such as the ESM — to got to banks.

Their preferred route is that banks needing more money would take it from shareholders and even depositors, the source suggested, especially after this taboo was broken with the Cypriot bailout.

“The atmosphere has changed. Putting public money in banks is politically a no-go move now,” the eurozone source said.

Professor Karl Whelan, UCD economist with extensive links in the EU, said he believes there is very little chance of getting ESM money to recapitalise Irish banks if they need it, and the Irish State cannot afford to spend more on them.

In the eurogroup “they have no problem with burning bondholders — they showed that in Cyprus”, he said. However, in Ireland that would mean burning the State.

He believed the most likely route will be that the stress tests will be designed in such a way that there will be few if any failures.

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